Less signalling – more manoeuvring, please

Capitalism is one of the most powerful forces in society’s arsenal, argues head of multi-asset investments David Coombs. It has lifted hundreds of millions of people out of poverty over the past 200 years. Time for phase two.

Car mirror

I am sat at my desk looking out the window at our two cars parked on the driveway. One of them hasn’t moved since December; the other has clocked up two miles in 2021. Their disc brakes have been rusting before my eyes for a year. Good for the environment though.

With pandemic restrictions seemingly stretching out into periods measured in years not months, with speed limits dropping to horse and cart levels, and with towns becoming car free, is it any wonder Generation Zers are deciding to avoid cars altogether?

For many of us, driving lessons at the age of 17 were a rite of passage. I can still remember, “mirror, signal, manoeuvre (MSM),” as if it was, “stay home, protect the NHS, save lives.” And that old driving advice has been buzzing round my head lately. MSM seems to fit other parts of our lives as well: mirror what others are thinking (don’t be cancelled), virtue signal on social media (get likes) and then, maybe, manoeuvre (actually do something).

As we launch our suite of sustainable multi-asset funds, I’m conscious that we must reverse this mantra: do something, communicate and hopefully others will follow.

To achieve this, we need to directly engage with the companies we invest in, whether via credit or equity. We need to understand those companies to know whether they are trying to do the right thing, that they are sustainable businesses. Monitoring sustainability ratings and screens will not be enough. The world is messy and complex, and the sustainability information we seek tends to be heavily qualitative – something that blanket rating systems struggle to effectively measure. That’s why some give roughly the same sustainability rating to cigarette companies that extensively report how bad they are as they give to smaller companies with less ability to report but better products and culture. Unfortunately, outcomes can be manipulated and communications exaggerated. Everyone wants to be ESG (environmental, social and governance) friendly.

Just doing the right thing

Our sustainable multi-asset funds will only invest in businesses whose operations make decent profits while also supporting the UN’s Sustainable Development Goals. These 17 goals just make sense, and they can all be summarised in one theme: looking after people. Treating employees and communities right, reducing poverty, and looking after the planet so we all have a healthier home.

We are bringing the same constructive scepticism to our sustainable objectives that you will recognise from how we approach our financial objectives. For example, we are not impressed by companies just changing their logos to rainbow, black or any other colours or fonts. We would rather work with those that can point to facts and results regarding diversity. We are impressed by honest and unvarnished transparency about businesses and credible strategies to do the right thing, all backed up with evidence.

We are not dazzled by companies that simply produce their anti-slavery or pay differential reports on time. Instead, we care about how businesses are actually treating their employees and those who are in their supply chain. We will engage with companies, make our own enquiries and when necessary challenge them robustly. Companies will make mistakes. We will make mistakes. That’s the human reality, and no different to investing generally: sometimes you buy the wrong thing. Sometimes the right thing will do something wrong. But we promise that we will be open about our investments. If we can no longer argue that a business is doing the right thing by people, ultimately, we vote with our capital.

Green gold is in those hills

One thing I can confidently predict is the acceleration in hyped-up ESG stories. It could be a rerun of the dot.com bubble. Lots of hot money chasing the next big thing in renewable energy or carbon capture, for example. We believe it’s crucially important to stay disciplined and focus on the fundamentals of every company we look at. Cash flow and profits (non-subsidised) are the cornerstone of durable business models, and that applies to sustainable investments as well. It’s the only way to ensure you don’t pay over the odds for a pinched-out claim.

There is no doubt in my mind that responsible capitalism is the best way to solve the planet’s issues. Just look at COVID-19 vaccines if you have doubts. Yes, government ‘encouragement’ might accelerate activity, but innovation based on profit has the best record in quickly and effectively supplying solutions to problems. Investing in that system for sustainable ends makes sense to me.

However, charlatans and fraudsters flock to all new markets, and sometimes people’s hopes can outstrip reality. As investors, we take nothing at face value and the same attitude will apply when we are running our sustainable multi-asset funds. We will be constantly checking that businesses’ actions match their promises. The need for caution has never been more appropriate.

If you’re interested in hearing more about our Rathbone Greenbank Multi-Asset Portfolio range, let us know by emailing rutm@rathbones.com or by calling 020 7399 0000 and asking for our investment sales team. We can then keep you updated as we launch.

 

 

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